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Financing Your Business

9 Things You Should Never Say to a Small Business Lender

Last Updated on December 6, 2016

Rieva Lesonsky is a small business contributor for Fundera and CEO of GrowBiz Media, a media company. She has spent 30+ years covering, consulting and speaking to small businesses owners and entrepreneurs.

When you’re applying for a small business loan, it pays to remember your mom’s advice to “Think before you speak.” No matter what type of loan you are looking for, you’ll improve your chances of getting your loan application approved by avoiding these 9 things you should never say to a small business lender.

1. “I haven’t filed my taxes yet.”

Typically, lenders will look at the past two years’ tax returns before approving a loan. If you haven’t filed your most recent tax returns, lenders won’t be able to verify last year’s revenue. And if the lender isn’t confident that your business is bringing in enough revenue to pay back your loan, odds are they won’t be comfortable lending to you.

Keep in mind that for most business loan applications, your lender is going to want to see both your personal and business tax returns. If you haven’t filed the tax returns that the lender needs to see, that’ll be a big red flag on your business loan application.

2. “I’m not sure how much money I need. How much can you lend me?”

Lenders want to see that you’ve thought through exactly how much money you need and what you are going to use it for. This should be supported with calculations such as the cost of the equipment you’ll purchase, the building you’ll buy or the material you’ll order with the money they provide.

When it comes down to it, lenders will think you’re a strong candidate for a business loan if you’ve taken time to prepare your business loan application. And knowing exactly how much you need in a loan to move the needle for your business shows that you’ve put some thought into exactly why you need the capital.

3. “I only need $250,000, but as long as I’m here, why not throw in a little extra and make it $350,000?”

Asking for more financing than you need may seem like a smart idea, but lenders see it as evidence you are flying by the seat of your pants. Remember, lenders deal with lots of businesses like yours, so if your figures are out of whack with industry averages, they’ll think you don’t know what you’re doing.

4. “I don’t know my business credit score.”

Most people know how to monitor their personal credit score, but many entrepreneurs don’t know their business credit score—or even realize they have one. Start monitoring your business credit score as soon as you start your business. Experian, Creditera and D&B are among the sites that can help you check and monitor your business credit score.

When you do learn where your business credit score lies and it’s not where you want it to be, take steps to bring up your score—and your chances of approval.

5. “How much of my own money am I putting into this business? None—that’s why I’m coming to you.”

Any lender will want to see that you’ve put some of your own capital into starting your business. After all, if you don’t believe in the future of your business enough to make sacrifices for it, why should they? Do whatever you can to come up with at least 20 percent of the startup capital you need in order to launch. And once you’ve shown that you have invested in your own business, then lenders can get comfortable investing their own money in your business, too.

6. “I don’t need a business plan; I’ve got it all in my head” or “I don’t need a business plan; I’ve been operating for five years without one.”

Whether you are financing a startup or a growing business, lenders will want to see some type of business plan to prove that you have thought through how you will grow your business and what you’ll do with their money. If your business is already up and running, grab your old business plan and update it, or create a new one. It’ll be easier since you have real numbers to work with and real success to show.

Remember: Your business plan doesn’t just show your business’s financial projections. It also shows the more qualitative aspects of your business. It answers questions like, “Why is your business unique?” “Why does it serve your customers better than your competitors do?” “Where will it be in 5, 10, or 15 years?” Your business plan is your time to explain why your idea is valuable, and why lenders should invest in you.

Whether you’re launching a startup or you’ve been at the helm for some time, a business plan is valuable for many more reasons than just getting financing—so don’t skip this step. And if you’re wondering just how to write a strong business plan, the SBA has a comprehensive guide to putting one together.

7. “If I can get just 1 percent of this $1 billion market my first year in business, my sales will be $10 million.”

Lenders see overly optimistic projections from startup entrepreneurs all the time. Getting 1 percent of a massive market is very difficult; in a market that big, you will have lots of competition. Writing a business plan will help you think through these projections, come up with more accurate ones and figure out how you’ll market your business to achieve the market share you want.

It’s important to be realistic when you apply for a business loan. Yes, every small business owner would like a cool $1 million to finance a business, and every entrepreneur thinks that in 2 or 3 years, their company will be the most successful in its market. But when it comes to your loan application, lenders want to see that you can be realistic about where you’ll be in 1, 5, or 10 years, and what you really need to get there.

8. “I don’t bother with financial projections; they change too much.”

Lenders will want to see at least two years’ worth of financial projections to assess your business’s potential profitability and whether you have enough cash flow to pay back the loan. Creating financial projections can be challenging—especially for a startup—but it is essential to convincing a lender you’re funding-worthy.

Besides, lenders are well aware that projections aren’t set in stone; they just want to see that your estimates are realistic and that you’re serious about managing your small business funding.

9. “As you can see from my cash flow projections, I’m barely breaking even; I need your loan to help change that.”

Lenders are conservative and care most about getting their loan repaid. If you’re barely breaking even, they’ll worry that the loss of one client or customer could wipe out your ability to pay back their loan.

You’ll need to prove you have a sufficient cash flow cushion to keep paying them back evenif your business experiences hard times. Also, make sure your cash flow projections include the amount of financing you’re requesting and the loan payments on it.

So when you’re sitting down to talk with your lender, prepare for these kinds of questions—and try to avoid these 9 answers by being fully prepared for your business loan application.

And when it comes time for you to ask the questions, watch this video on what ever borrower should be asking their lender before they sign on the dotted line.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those
of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Rieva Lesonsky is a small business contributor for Fundera and CEO of GrowBiz Media, a media company. She has spent 30+ years covering, consulting and speaking to small businesses owners and entrepreneurs.